Algorhythm Holdings Inc (RIME) 2004 Q2 法說會逐字稿

Welcome to The Singing Machine second quarter results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

At that time, if you have a question, you will need to press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Friday, November 7, 2003.

I would now like to turn the conference over to Mr. Jay Bauer, Chairman of The Singing Machine.

Please go ahead, sir.

Thank you, Operator, and good morning.

As you know, I became the Chairman of the Board of The Singing Machine company last month, so I wanted to take this opportunity to introduce myself.

I've been involved with the company as an investor and board member since 1990.

My most recent service on the board began in 1999.

I also personally own more than 1 million shares of stock.

Obviously, I believe strongly in the future of Singing Machine.

My goal is to increase the value of this company for every shareholder, including myself.

My background is relevant.

I founded [inaudible] Research in Tokyo in the late 1960s, had designed, engineered and developed car audio products for Blaupunkt, Grundik and Motorola.

I sold 75% of the company in 1981 to Blaupunkt and managed it for them until 1987 when I repurchased the business from them.

I also was a founding shareholder of Sage [inaudible] Casting in 1985.

This company went public in 1992 and was sold to GE Capital in 1996.

I've been involved in consumer electronics and other consumer products my entire adult life.

I understand how to design and sell consumer electronics, and I understand what it takes to market them effectively.

I also know what is involved in building and running a growing business.

I assumed the responsibilities of Chairman of The Singing Machine with utmost seriousness.

I'm now actively involved in the business on a day-to-day basis.

I am working closing with Y. P. and his team and we position the company for sustained growth.

This is a project that will take time to complete, and I recognize that this is a transition year for Singing Machine.

I'm confident that the work we are doing today is getting the company back on the right track.

One of the many projects has been to add additional consumer electronics expertise to the board of directors.

In this believe that we have succeeded admirably with the recent announcement of two new outside directors that bring a great deal to our company.

Bernard Appel held every key merchandising position at Radio Shack during his 34-year career there, culminating with his promotion to President and Chairman.

Richard Ekstract created, financed and launched more than 20 business and consumer periodicals about the consumer electronics industry during his career.

I expect both these distinguished gentlemen to make important contributions to our success.

We have a lot to report this morning so now, I will turn the call over to our Chief Financial Officer, April Green, to review the second quarter results.

I will be available to answer questions later.

April?

Thank you, Jay.

And good morning to all.

We announced that this conference call will include forward-looking statements.

These statements are based on current expectations, estimates, and projections about our business based in part on functions made by management.

These statements are not guarantees of future performance and actual results may differ materially.

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and Singing Machine's various filings with the SEC.

The statements made during this call are made only as of the date of the call, and we undertake no obligation to update these statements.

Revenue for the second quarter of fiscal 2004 was $31,984,000, compared to revenue of $32,270,000 last year.

Sales in the United States declined compared to last year to about $14.2 million, compared to $25.3 million last year while international sales increased for the first six months.

Gross margin declined to 12% from 24%.

Approximately 600 basis points of this decline was due to the reclassification of royalty and advertising costs under the costs of goods sold category from SG&A where it was held last year.

The remainder of the decline is due to a higher percentage of sales to international customers in the period.

The working down of low margin inventory, lower sales of music software over last year.

Lower sales of music software are pending -- are primarily due to the pending release of our Motown CDs, new packaging, competition, and a gearing up of our agreement with Warner Bros. which was also announced this morning.

Operating expenses increased by about $1.6 million for this year's second quarter as compared to last year.

The increase in SG&A reflected higher commissions due to higher distributor sales, higher warehousing costs, a $240,000 increase in accounting and legal fees, and fees associated with our new credit facility.

The increase in compensation expense primarily reflected stock-based compensation paid certain executives who had agreed to a reduction in cash compensation.

The net loss for the second quarter was $656,000, or 8 cents per share.

This compares to restated net income of $3.8 million, or 43 cents per diluted share for the prior year.

I will remind that you we restated the net income for the last year in connection with certain tax issues related to our Hong Kong subsidiary.

You can find a complete description of these issues in our Form 10-K from the fiscal year ended March 31, 2003.

For the six months ended September 30, 2003, revenue increased to $39.3 million from $36.2 in the prior year.

For the first half, sales in the U.S. amounted to $21.5 million, which was down from $29.2 a year ago.

Sales to Europe grew substantially, including large increases in France, Italy and the United Kingdom and also initial sales of $2.2 million in Denmark.

A net loss for the first half was $3.5 million, or 42 cents per share.

This compares to restated net income of $2.68 million, or 30 cents per diluted share for the first six months of fiscal 2003.

On the balance sheet side, inventories had declined by approximately $4.6 million.

Y. P. will have additional comments regarding inventories in a few moments.

The increases in accounts receivable and accounts payable reflect our normal seasonal pattern for this type of business.

Shareholders' equity was approximately $18 million at September 30th, up from $17.7 at the end of fiscal 2003.

Y. P.?

Thank you, April.

We have increased our progress during the quarter in implementing our plan to public position Singing Machine for the future.

We have moved forward in financing cash flow management, reducing old inventory, supply chain management, international partnership, product development, and distribution, as well as our music business.

On the financing side, in August we close a new $12.5 million line of credit with LSI Bank, we raised an additional $4 million through the shares of convertible debenture and $1 million by the insider.

As to LaSalle, we believe that we have the capital we need to stabilize and grow the business.

The account inventories, as April mentioned before, our total inventory declined by about $4.6 million to the quarter.

It is important to notice that this number includes new inventory we have purchased in preparation for the Christmas season, and so it does not affect our actual sale of the inventory carryover from last year.

You will recall that our old inventory amount to $26 million at March 31, 2003.

As of November 1, we deliver $12.5 million to customers.

After the remaining $13.5 million, we have committed order, a partial order, for about $9 million, which is scheduled to be delivered to customers over the next few weeks.

Thus, the unsold inventory from the original $26 million is only about $4.4 million as of November 1.

We expect inventory to reduce further in the current quarter as we enter our peak sale season (ph).

Our goal is to minimize inventory in the future by generating last year our total sales through [inaudible] and in small share then was previous [inaudible] through the [inaudible] excess while inventories own and held by our company in the United States.

By substantially reduce our inventory, investment in inventory, as well as the warehouse and our source of labor and other costs, we try to reduce risk and enhance our competitive positioning.

On the warehouse front, we have received an offer to sublease our warehouse in California, which will reduce our expense by about $400,000 per year.

We will no longer need this space in our new inventory strategy to [inaudible] for us.

Our focus on supply chain management has emerged as a key advantage for our company in today's increasingly competitive environment, especially since most [inaudible] are produced in China. [inaudible] competitor will purchase [inaudible] from supply solely based on price.

We work with our supply to create better value for our customers for our mutual benefit.

We have worked with our key suppliers for many years and they support us during the company's liquidity (ph) crunch.

This enabled us to deliver goods on time to all our major retail customer in the current seasons (ph).

We are also working with our key customer in the United States and our distributor in Europe to grow the business.

In the United States, we have returned our system account and a number of new accounts such as Radio Shack, Circuit City, and Kohl's.

We also continue to expand our international business [inaudible] distribution channel.

And we are now looking to Eastern block countries to increase our international sales revenue as well.

Now, I do not want to mislead you.

Let me state clearly that the competition is fierce, especially in the U.S. market.

We have lost some SKU to competitor because we are not able to meet what we feel was giving away price.

We are not -- but we are getting our new customer by sticking to our strategy to protect our margin by focusing on reliability, deliverability and quality.

We offer a wide array of karaoke systems at the a price point for every budget and our reputation for quality and on-time delivery set us apart from our competition.

We are proud that Singing Machine continues to set the standard of excellence for product feature, quality and reliability in the home karaoke industry.

One of the benefits of our close relation with our customers that the feed that we get help us design new product with feature and price the customer wants most.

We have delivered a [inaudible] a three-tier product strategy to reflect this [inaudible].

At the high end, we're continuing to invest in R&D, to develop products that define the state of the art design and quality for high-end specialties [inaudible].

In the middle tier, we continue to [inaudible] to our product to enhance [inaudible] for our customers.

And the low price, [inaudible] we continue to [inaudible] closely with our supplier to reduce the price to protect our margin in market share in today's competitive environments.

I should add that we also began to seek (ph) patents to protect our key technology in investment R&D.

So far, we are filing applications with two provisional patents for our new product; and we are looking to apply a few more in the next few months.

Returning to the music part of our business, as we mentioned in this morning's press release, which just signed a letter of intent with Warner Bros.

Publications.

Warner Bros.

Publications is a Warner Bros. -- Warner Music Group Company which, in turn, is a a division of Time Warner.

Under this agreement, Warner Bros. application will distribute our karaoke music through a variety of channels, including [inaudible] shows for us, the Warner Elektra Atlantic sales force and the Internet channel with Warner Bros. [inaudible] center and related channels.

Those of you who have followed Singing Machine for a while know that we had saw a strategic alternative to expand our high margin karaoke machine business.

We believe that this agreement with Warner Bros.

Publications is a wise solution.

We expect to complete a definitive agreement in December; but in the meantime, our karaoke music already are featured in various Warner Bros. marketing material, which give access to this exciting new distribution channel in time for the holiday and beyond.

Another key important point that we believe Warner Bros. will be able to help us, is selling product more consistently throughout the year than we were able to do with our existing distribution.

Finally, we hope that our partnership with this leading music distributor will help us to offset the loss of our music in the beginning of the year.

The steps we have taken in the past six months will benefit us as we move forward.

We expect the sublease of the warehouse, the schedule [inaudible] of guarantee loyalty to certain products, and reduced legal [inaudible] and banking fee, as well as the other cost reduction measure, we will save us at least $3 million next year.

I will close by saying that due to many difficult issues we faced during the past year, we are satisfied with the LaSalle and we are really proud of the Singing Machine's team as we all work together to get the company back on the right track.

We expect to improve top and bottom line [inaudible] in the December quarter.

Now, Jay, April, and I will be glad to answer our questions.

Robert, can we please have our first questions?

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session.

If you do have a question, you will need to press the 1 followed by the 4 on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the 1 followed by the 3.

If you are using a speakerphone, please lift your handset before entering your request.

One moment, please, for the first question.

The first question comes from Ian Gilson with Roth Capital Partners.

Please go ahead.

Good morning, gentlemen and lady.

Good morning, Ian.

Good morning.

I have about -- at least 10 questions.

So if you want me to basically move them in blocks and then let somebody in, I will be glad to do that.

My first question relates to the Warner Bros. agreement.

What channels of distribution will Warner Bros. be using?

And will this enhance or improve the availability of music in the low-end stores such as K-Mart, Wal-Mart, Target, Toys R Us?

Because, frankly, in Southern California the distribution of Singing Machine content is at best, negligible, and at worst, nonexistent.

And secondly, if you've moved expenses from the G&A line up to the gross expense line, why did G&A increase so dramatically?

It seems that if are you paying a million dollars a quarter extra for accounting and legal expenses this seems to me to be somewhat exorbitant.

And what will happen to these gross margins as you move forward?

Do you have those line items available so that we can look at them on a year-to-year basis so that we can better sort of do our research going forward, or if that is not available, could you give us a historical number so that we could just -- history on a comparable basis?

And that's the first set of questions.

Okay.

Ian, let me take your first question regarding Warner Bros.

Warner Bros.

Publications has internal search organization that sells music to 8,400 stores in the United States.

An example would be the [inaudible] centers [inaudible] and they also have a distribution channel, WEA, that's Warner Elektra Atlantic corporation to market [inaudible] media large dial to the mass merchant account.

And, hopefully, their distribution channel we're enable to address the issue in California about our [inaudible] our machine.

On top of that, we also utilized the Internet distribution as well.

The Internet features don't seem to work too well since a lot of music apparently is not available through any Internet source that I have looked at, including those that are directly related to the Singing Machine.

Well, unfortunately, that has been the case in the past.

In the future, through Time Warner distribution, which is a large distributor of music as well; and I believe such retailers as Amazon, which has proven their online presence, you will be begin to see a lot more music from the karaoke end.

Ian, one moment.

I want to just really re-emphasize that today the importance of Warner Bros. to work with us is of extraordinary importance to us, and they're very excited about it from their side as well.

Today, as Y. P. mentioned, and I must emphasize this especially, any large company today, whether it be Best Buys Target, is really buying from music distributors who can service these accounts much better than an individual company.

That will bring tremendous stability and growth to our music business.

Furthermore, since they are servicing 8,000 stores, also throughout the year the seasonal -- clearly, the seasonal approach is still going to be there.

A lot is going to happen for the last quarter and at Christmas and the first quarter -- and the fourth quarter.

January is a big month, also for music.

But clearly, throughout the year we basically have very, very little sales.

This distribution through Warner Bros. will supply us, I'm sure, with not insubstantial business orders throughout the year at times when our business normally would have been very low or nonexistent because the larger companies do not put so much emphasis on karaoke during the slower months.

So it is a very, very important agreement for us and we're very excited about it; and it should really bring good results for us.

[inaudible] April just --

Yeah.

And when April answers my other questions, if she could mention what music sales actually were dollars vis-a-vis dollars last year?

Okay.

As far as G&A is concerned -- I did mention that, obviously, we have a large G&A.

We're looking at approximately a half million dollars that we have spent in legal and accounting fees increase this year.

As you know, we have the class action lawsuits, we have a number of issues that have had to increase our costs.

We are also paying much larger facility fees to our lender than we have in the past that amounted for approximately $300,000.

Beyond that, the compensation increases that I did mention as well, [inaudible] rather large increase --

But that's broken out separately, is it not?

Yes, it is.

I'm sorry.

I'm talking about those expenses that were transferred from G&A into the cost of sales.

And why, even after all of that, did you have a sequential increase of approximately a million dollars in G&A expenses?

Okay.

As I mentioned -- well, I did mention the increase in G&A; and I have hit on the highest points of that.

There are various smaller expenses that did increase that are not significant in each statement but in combination they are more.

The line items that were moved, advertising -- advertising was substantially increased over last year.

We have approximately -- it is approximately a $400,000 change over last year.

Royalties --

Sorry.

Advertising was approximately $1.1 million?

Yes, that's correct.

Okay.

Royalties?

Royalties, I cannot go into the extreme intricacies, but we have higher royalties expenses due to our guarantee with MTV.

That amounted -- actually, it is not that significant over last year.

It is actually pretty close to the same.

So that's approximately $810,000?

I'm sorry?

I'm sorry, I missed that.

Royalties last year were $810,000.

Right.

It is approximately the same this year.

It is a negligible change.

Okay.

Those are the two items that were moved.

Commissions?

Commissions?

Commissions were -- last year commissions --

$440,000?

And this year's commissions amounted to -- I apologize.

I did not break that line out [inaudible] in the queue, so I'm having to look -- I'm seeing commissions increased approximately $200,000 over last year.

So commission is included in the selling, in general, and did not move up to gross cost of sales?

That is correct .

Are there any nonrecurring expenses in the line items reported for the second quarter?

There will be, yes.

The accounting and legal fees, we're expecting much lower fees next year.

We still have to --

No, no, no, no, no.

Were there any nonrecurring expenses, charges, write-offs, or anything like that in the second quarter?

Yes.

We had fees associated with a settlement with A.G. Edwards.

That's a one-time-only fee, which was approximately $200,000.

We had fees associated with a departing director, which I cannot disclose that information at this point; but it was a substantial number.

And those are really the two main nonrecurring.

Are there any covenants in the LaSalle agreement which are now closed, or are there any violations in that agreement as a result of the second quarter numbers?

There -- I'm sorry.

The [inaudible] 14 of the LaSalle agreement, they expressly waived any defaults that we had under the agreement.

And I am proud to say, as of this point, we are fully in compliance with all covenants of the loan agreement.

If do you not make money in the second half of the year, will you be in violation of any covenant as of year-end?

I don't believe so .

Okay.

In The Wall Street Journal the other day -- and some other things that I have been reading -- there was a discussion of bulk freight expenses, that they have increased dramatically over the last few months.

Are your bulk -- are your container expenses going up, or can you buy forward?

Or what is the outlook for freight expenses?

At this point, I don't see a great increase.

There is a possibility of a slight increase.

I think it will be minimal at this point.

Interest expense, does that include the fees to LaSalle, or is that just straight interest expense?

Interest expense includes fees to LaSalle.

It also includes amortization of issue costs in the debenture.

Ian, this is Jay again.

Ian, I know you have a lot of very good questions; and, believe me, I do not want to cut you short.

But there are a lot of people who really want to ask some questions, also --

I have only one more.

-- at some point to call back.

I'm certainly available, but I think we need to be a little bit mindful that there are other people waiting.

And I do appreciate your input and you mean a lot to us and we will give you all the answers that you need.

But if you could please understand that we need to also let somebody come into this conference.

Fine.

Go ahead.

The next question comes from Linda Donnelly (ph) with Wachovia Securities.

Please go ahead.

Thank you.

Could you tell us, for the inventory ending September 30, how much of the carry-over had been sold by that time?

Okay.

Linda, give me a moment.

Let me go -- I have the number as of November 1; and if you give me a moment, let me look on my computer and get the information for you.

Okay.

Another question I had is: For the quarter -- second quarter just ended, why was the tax benefit calculated at 62%?

The tax benefit was actually calculated at 24% of a blended rate based on the effective rates.

Okay.

And, finally, it was just asked by the -- I believe, Ian was asking -- if you don't make a profit in the second half, would you be in violation of covenants?

My question is: Why would you not make a profit in the second half of the year?

Well, at this point I can't comment on forward-going, whether we are going to make profits or not.

We expect this year to -- with our level of sales for the third quarter, we don't know what we are going to expect.

I am going to let Jay respond to that.

Linda, this is Jay Bauer.

Linda, we are going into traditionally our strongest season.

We're in the midst of our strongest season right now.

Historically we sell about -- 60% of our sales in revenue come really from the third and fourth quarter.

I can only say one thing, that we do expect certainly improved results on top and bottom; and our backlog of orders is to our expectation; and we should certainly -- the situation should improve substantially in the next six months.

There is a very wild card, which is the music business which we expect to improve dramatically; but we cannot give really any information on that right now.

Because clearly with Time Warner, we need to see the next three or four weeks to see what kind of business is being generated.

All I can say is that the outlook for the next six months is certainly -- it looks positive and we expect, as I said, substantial improvements here.

Let me get back to your question about how much inventory we have moved as of end of September.

I have -- I keep track of the inventory on a weekly basis.

For the week ended September 29, I ran through my last thing here, that we deliver about $9.9 million inventory out the door.

Great.

Thank you very much.

Thank you.

The next question comes from the line of Eric Connerly with Boston Partners.

Please go ahead.

On the accounts receivable, how much of that is due to consignment or recourse sales?

There is no consignment in accounts receivable.

Consignment is only booked as sold.

Is there any recourse whatsoever for those receivables?

Recourse for the -- there are no consignment receivables.

Recourse on regular receivables is normal course of business.

And what was the reserve at September 30?

The reserve at September 30 was approximately $170,000.

Great.

What was operating cash flow in the quarter?

Just one second.

Let me switch pages here.

Operating cash flow was a use of $5 million for the six months.

This is much improved from -- compared to the same period last year, our operating cash flow was minus $11 million.

And, as you know, the second quarter is where we get a good ready for the peak season.

So you look from year-to-year comparison, the operating cash flow reduced by $6 million [inaudible] primarily because we [inaudible] in inventory which we don't have to pay for.

Okay.

And where did the -- from what does the approximately 200,000 share increase in shares outstanding arise?

Exercise of options.

Okay.

Thank you.

Okay.

Thank you.

Thank you.

Once again, ladies and gentlemen, if you do have a question, please press the 1 followed by the 4 at this time.

Tristin Barr (ph) with MTB Capital (ph).

Please go ahead.

Hi, guys.

At what point are you going to start giving forward guidance?

I mean you expect that -- you said that you expect next quarter to improve over this quarter, which really isn't saying anything, because this quarter was frankly pretty terrible and next quarter is historically better than this quarter anyway.

Unfortunately, this company really doesn't have the credibility anymore to say just trust me, things are going to improve, and we're going to earn your trust and frankly earn your money as shareholders.

I mean, at what point are you guys to going start giving forward guidance and being a little bit more open with the street?

Tristin, as we said in early this year, the board made a decision not to provide any revenue earnings guidance or releasing that.

I mean, we had been a victim of distributing our forecast in guidance.

And, however -- and we are committed to shareholder value and information transparency.

As you know, this is a cleanup year [inaudible] years.

So what we are going to is we are primarily focusing and make sure that the business model is sound.

And once we get it under control, and I think we will have a lot more ability to predict our business.

You guys haven't been victims of forecasting, you've been victims of mismanagement.

These are things that you can control.

I just -- I find it very difficult to believe that in what is one of your seasonally stronger quarters that you guys show a loss.

This is Jay Bauer, again.

Let me just make a few remarks about this.

Clearly, clearly, I am personally very disappointed about the results.

There are some good reasons why, and they can be explained.

That is not satisfactory to me, and it is definitely not satisfactory to you as well.

I am committed to really involve myself here; and I must say, at this point, that I am doing this on a -- I'm not getting any salary, I'm not being paid by the company, I'm doing this because I've come in on a high point in this company and it certainly, at the moment, will be the low point of this company.

And I don't like that;

I don't appreciate that; and I, myself, have approximately close to $4 million invested in this company.

I wish I could give you some more definitive information.

I'm sure that at some point we are going to be back to giving some forward-looking information; but at this particular moment, it is not prudent to do so.

I, for myself, am a very transparent person.

I believe in giving clear information, good news or bad news.

And maybe -- and you were right, the company certainly in the past has not really earned the trust; however, we are about to change this.

And I know you've heard this before, but I will be very transparent here, and I will be involved.

I will be coming to the company at least three or four times a week to stay in touch with everybody.

I have made already a couple of -- how shall I say -- I cannot really inform you about certain things right now, but I can tell you that things are going to happen in the next three or four weeks which I will consider a very positive for this company.

And at the point when I make a decision to release the information, it will be released.

I have to ask you to just trust us maybe this one more time, and to give us all a chance here to show that things will not be as usual; that there is going to be a change; that we are going to attack all these issues; and that I will see to it as much as possible, with the team that I am working with, especially with a very strong board of directors that I have here to work with me; that we will make the right decisions to put the company on the right footing, and to instill some cost reductions, further reductions, that will be helpful to the company.

I can say also one thing, that the karaoke business is still an extremely strong category.

And the fact that it missed out on a couple of sales this year was two-fold, also.

One was that we were saddled with coming from maybe an exuberance that was a bit misfounded last year, with an inventory that was in excess of $26 million.

As a result, we were -- our negotiations with LaSalle were only really completed in August, giving us very, very little time to really gear up a more financially -- also for the upcoming season.

However, more importantly than that, we decided clearly not to bring in more merchandise, because for sure we needed to clear out our inventory which clearly has also had a drag on the margins, if you can understand.

We've also declined not to bid on a couple of [inaudible] -- here is a very important thing.

We have not lost any customer.

We've added customers.

But what has happened is also that in some categories in some models we had just bowed out because it didn't make sense to us to commit capital to some models where we would have made zero profit or lost money.

I think we are repositioned.

We have very good understanding and very good working relationship with our supplies in Hong Kong.

I think we are going to be competitive, even more competitive next year.

We are coming up with a new model line that I think is going to be very updated and that should appeal to our customers as well.

So all this said and done, I want to you understand I understand your concerns.

They are my concerns as well.

I have a lot of money riding here, not just a paid employee that says well -- I have nothing -- I have a very, very important investment here.

And besides, I involve myself in things.

I would like to see that every -- there is no stone unturned, that we will move this company forward.

So this is what I can promise you.

I cannot tell you more at this point.

But I can promise you that I'm available here, I'm accessible, and anything that would come out will be transferred.

And I do hope that we will be able to go back to a more forward-looking time where we can give some more information, but I want this to be on a solid foundation and not just to throw out numbers.

And I hope that you understand that I want to take a prudent route here in the best interest of all the investors and the company.

Thank you.

And just one more point, too.

We are not going to give you the forward [inaudible] but you're looking from a historical perspective for year 2001 with the approximate 4% of our business in Q1, we did 35% of our business in Q2, we did 60% (ph) our business in Q3, and we did 12% of our business in Q4.

So that was the historical perspective, and the past couple of years are pretty consistent in terms of the revenue generated in each quarter.

Right.

But for the last five or six years you've been profitable in that quarter, correct?

That's correct.

That's correct. --

I guess the one concern that I have is that karaoke is so strong at this point in time, and you guys are affecting a turnaround, granted; but you think you would be insulated by the strength of the category.

And also in terms of the margin pressure, I mean, you're operating with probably the best brand name in the business in terms of the MTV license.

I mean, is that license not insulating you at all from pricing pressure?

The MTV license is very, very important for the software.

As far as hardware is concerned, I must unfortunately tell you that at this -- especially this year, most buyers have been looking not so much at a logo or our special brand but at pricing.

Now, I can also tell that you this may change somewhat next year.

Because we do also know that some of our competitors, some of them have promised deliveries which they then haven't made; and so this is one area where we at least are very, very much in very, very good relationship with any of our customers.

Because one thing we've always done, we've always delivered on time and kept our customers [inaudible] merchandise as they needed it.

So brands are important.

But in the hardware arena it does [inaudible] -- however, we are coming up with some very strong models that are very, very special next year which we will also use the MTV brand.

And we do believe that we can reposition ourselves, but it does not insulate you completely at -- in a very competitive area this year (ph).

And we have some ideas how to position that particular brand in the more upscale market, and there it means a lot.

I can also say to you that our international customers in the UK, we are in negotiations about a license with MTV on that for that market.

And that shows also that that brand is important.

Okay.

Thank you.

Thank you.

The next question comes from Ian Gilson with Roth Capital Partners.

Please go ahead with your follow-up question.

Now get an answer to my questions about the software revenue in the second quarter of this year and what it was last year?

Okay.

Software revenue for the second -- for the year to date -- you just want the -- okay.

Let me give you the six months, because I have it right here in front of me.

For the six months, it was $700,000 this year as compared to $2.5 million last year.

Okay.

Now, the answer on the tax question was frankly not an answer.

Let me give you two points.

If you had a blended rate of 24%, that implies you actually had a $4.2 million tax loss.

Furthermore, if you had dropped the inventory reserve from approximately $3.5 million down to $170,000, you actually lost about $3.3 million more than you reported, which also equates to a $4 million loss in the quarter on an operating basis.

Given the fact that you had lost $4 million in the second quarter, it seems difficult, given your explanations to date, to see how you can make a profit in the third quarter.

Okay, Ian.

Let me address these one point at a time.

No. 1, the reserve that we were speaking of with the gentleman earlier was the reserve on accounts receivable.

That is correct. $3.5 million at the end of last year, I believe.

It was approximately 350,000, 400,000 at the end of last year.

Yes, that's correct.

The inventory reserve is a totally separate item.

The inventory reserve at September 30 is still at $2.3 million.

So that was not (ph) to be recaptured this year.

So in other words it went down.

So of the revenue -- of the inventory that you sold last -- that you sold this year that you had at the end of last year, you lost approximately $1.2 million?

Correct.

And also, the $4 million was for the six months and not the three months.

You had zero taxes paid essentially in the first quarter?

That's correct.

So a 24 blended rate for the year you still lost, for tax purposes, $4 million?

That's a decent assumption, yes.

If we do have in the future, the near future, some significant announcements, will you hold a conference call this time?

We will take that under advisement, Ian.

We have discussed the possibility of that in the past, and we will definitely take it under advisement.

We would assume, therefore, if you don't hold a conference call it is not a material announcement.

Okay.

Well, like I said, we will take that under advertisement and we will plan accordingly.

And then we -- yeah.

Thank you.

Thank you.

Thank you.

The next question comes from Linda Donnelly (ph) with Wachovia Securities.

Please go ahead with your follow-up.

Thank you.

I neglected to ask you, since you have given us the restatement of the first and second quarters of '02, could you give us what the restatements are for the third and fourth of '02?

I do not have those readily available in front of me.

We will be filing those restatements within the next ten days.

Great.

Thank you.

You're welcome.

At this time, I'm showing no further questions.

Please continue with your presentation or any closing remarks.

Okay.

Thank you, ladies and gentlemen, for participating in today's conference.

And we look forward to talking to you again next quarter.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

You may all disconnect, and thank you for participating.